Barnett Waddingham’s annual survey of the FTSE100 has revealed that 96% of companies increased their IAS19 discount rate at 31 December 2012 relative to the yield on a long term AA bond index. The survey, which is in its twelfth year, focuses on the assumptions adopted by FTSE 100 companies for determining the value of their pension liabilities for accounting purposes.
Nick Griggs, Head of Corporate Consulting, Barnett Waddingham said:
“The significant fall in corporate bond yields as well as a steepening of the yield curve has meant that companies should carefully consider their approach in setting their discount rate. Many companies will be using an index yield approach, which could mean they are overstating their accounting liabilities.
“The FTSE100 companies covered by our survey will be disappointed that despite £12bn being paid into DB schemes during 2012 there has on average been no improvement in IAS19 funding levels.”
Results from the survey also show:
• Average IAS19 funding level was approximately 89% in 2012 (the same as in 2011)
• The average RPI inflation assumption adopted by companies in the survey was 3.0% p.a. (3.1% in 2011).
• Owing to the high level of demand for fixed interest gilts there is less of a justification for allowing for a significant inflation risk premium in deriving the inflation assumption. The average inflation risk premium adopted by the FTSE100 companies fell to 0.1% p.a. (0.2% p.a. in 2011).
• The average difference between RPI and CPI fell to 0.8% p.a. (0.9% p.a. in 2011) giving some small indication that companies were anticipating a change in the calculation of RPI for it to be brought more in line with CPI. An ONS announcement in early January confirmed that there would be no change to the calculation of RPI.
• The average real salary growth assumption dropped to 0.5% in 2012 (0.7% in 2011)
• The average male life expectancy assumption in 2012 increased to 27.4 years for current pensioners (27.1 in 2011), based on a retirement age of 60.
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